Seeking mutual reassurance

It’s a grey day in Davos, in every possible sense. With their celebrated attention to detail, the Swiss have provided weather to match the mood. Once or twice, the sun threatened an appearance, but was quickly obscured. And there’s not a green shoot in sight.

Why are people here then, one might ask, if it’s gloom and doom from cappucino to gluwein? I guess the answer may simply be that they come in search of some mutual reassurance. After well-publicised recent departures (John Thain was supposed to be speaking on a panel I am chairing tomorrow), people are comforted to see that some of their co-conspirators are still alive, and still employed. Marcus Agius and Victor Blank empathised over coffee – with a former regulator in attendance of course, to ensure fair play. Bill Rhodes of Citibank (who flew here commercially, he is keen to confirm) is still around. There are even one or two investment bankers, flying the flag for the Street. But they are all aggressively low key, if such a thing is possible.

Apart from the wallowing, what else is on the agenda?

Global imbalances made a strong showing on the first morning. Tim Geithner’s reference a couple of days ago to China’s “manipulation” of the RMB exchange rate seemed to set a new tone on behalf of the new administration, one that has not gone down well here.

Davos tends to be populated by people who prefer jaw jaw to the other thing, and who believe the Chinese do not react well to tough talk. Wen Jiabao was also here today, which thrilled the organisers, and there are no members of the Obama team to put the contrary view. But frankly this is the kind of top level issue which is not going to be moved forwards in the mountains, especially in the absence of the US. (It’s not true that there are no Americans, of course. There are squadrons of ivy-covered professors, ready with their views on policy of all kinds, which gives the odd impression that the US has been taken over by a group of philosopher kings.)

I have been more struck by the way the debate on European economic and financial policy is developing. And that is not very positive news for the British government.

It is accepted that the eurozone is under stress. The spreads on member country sovereign debt have been widening considerably, with the Greeks, Spaniards and Portuguese under particular pressure. Those countries also have large current account deficits and can’t attempt to devalue their way out of them as we are doing. In London there is dark talk of a possible break-up of EMU. Elsewhere that option is discounted, but the problem is nonetheless understood.

Prime minister Juncker of Luxembourg – who believes that the answer to every European problem is “more Europe”, has proposed common debt issuance. The Germans have reacted with predictable horror. But here, eurozone economists and others believe something has to give, and tend to argue that the best answer is stronger European fiscal policy, involving a big increase in the central budget, at least for eurozone members. That idea will not be welcomed in Downing Street.

It is by no means certain that the idea will achieve consensus, but I have been impressed by the number of people who think it must come on to the agenda, lest the alternative of euro break-up become a reality. So one outcome of the crisis could be a strengthening of European co-operation on macroeconomic policy – and on regulation, about which I shall write more later in the week.

The only cheerful comment I have heard all day came from a Russian banker, who said that crises of this severity come only once every 70 years. So we should suffer through it, then go back to exactly what we were doing before, confident in the knowledge that those alive today won’t have to relive the experience, however badly they behave.

There are fewer parties this year, though not as few as the pre-event PR would suggest. Tonight the rival attractions are a Barclays dinner in the Schatzalp Hotel or a Standard Chartered dinner in a chapel. That may reflect Mervyn Davies’s Welsh ancestry, as he sent out the RSVPs before he was nationalised. Barclays’ cabaret headliner is Boris Johnson; Standard Chartered’s is Bryn Terfel. I couldn’t possibly tell you which I have chosen to attend. But I will report tomorrow on the quality of the singing.

Sir Howard Davies is director of The London School of Economics and Political Science